Episode 42: SPECIAL EPISODE: How this MSP built his business

Episode 42: SPECIAL EPISODE: How this MSP built his business

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Episode 42: SPECIAL EPISODE: How this MSP built his business

 
 
00:00 / 00:38:59
 
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In this week’s episode

  • So, there’s easy growth and hard growth. Most MSPs go for the harder, less risky route of growing by obtaining their own clients over time. But occasionally we hear stories of MSPs who take the bold step of growing through acquisition. This special podcast episode is all about one such success story.
  • This week Paul invites an MSP owner to share their inspiring story. Listen as David Darmstandler from Datapath explains how he built up his MSP over a number of years through a combination of focus, hard work and also acquisition. There’s some great advice in this show – especially if you’re also looking to acquire or even be acquired
  • Also Paul’s special guest talks about how he has done something that most MSPs will need to do in the not-too-distant future; transition from being an MSP to a true MSSP (a managed security services provider)

Show notes

Episode transcription

Voiceover:
Made in the UK, for MSPs around the world. This is Paul Green’s MSP marketing podcast.

Paul Green:
Hello and welcome to an MSP marketing podcast special. It’s always good to hear other people’s stories and to hear how other people have made it, especially when they’re building up a business, that’s just like yours. And I’m joined today by a very special guest from the States to tell us how he built up his business.

Voiceover:
This is an MSP marketing podcast special.

David Darmstandler:
Hi, my name is David Darmstandler, I’m the CEO and co founder of an MSP and MSSP data path.

Paul Green:
And thank you very much for joining me for this special, David. So I want to explore today your story. I want to explore how you’ve built up the business, what the challenges have been on the way. And then in particular, there are two aspects that I want to examine because I think these are fascinating aspects that will affect a lot of MSPs. One of them is that transition from being an MSP, to being an MSSP, and we’ll come onto that later on. And also, I know you’ve acquired a couple of businesses on the way, and I think it would be useful to look at how you did that, what the pitfalls are and how you can position your MSP to be acquired by someone else, or go out and acquire an MSP yourself.

Paul Green:
So give us the overview of your business. Tell us when you started, what it was like in the first few years and sort of bring us up to date today in terms of where your offices are, how many staff you’ve got, that kind of thing.

David Darmstandler:
Data Path is, well, it’s 15 years old as of last month. We started June, 2005, not the best time to start just with the fact that we had a recession that kind of kicked off, at least in California here around that time. But we started off as really an hourly break fix IT solutions provider. So a good buddy of mine, James Bates, had already started as a sole proprietor doing a IT consulting. And him and I had been friends since the third grade and we’ve been talking about starting something together and we formed Data Path and the recession hit.

David Darmstandler:
And in a lot of ways it ended up kind of being a positive for us. People were laying off their IT departments, unfortunately, and we were able to come in and kind of just do hourly work. So we started off with a pretty low rate. And soon after we kind of developed what we didn’t know was managed services, but we created a couple of different plans. That was 15 years ago. So it was a lot of education to customers about what managed services was, why they needed it, completely different time in IT. Fast forward to today and it’s very rare that you have to educate customers on what managed services is, they understand. Pretty scrappy, actually, we’re in the middle of building our new headquarters now here in Modesto, California.

David Darmstandler:
And we were looking at old pictures of when we started and we had 100 square foot office and we had a little like dorm room fridge with servers stacked on it. And we’d grown to five people and you couldn’t even have all the people in the office, people were making phone calls from the hallway. And so it was just true kind of just gritty startup.

David Darmstandler:
And last few years, even though we’ve been around 15 years, we’ve done a couple of acquisitions in the last few years, been buying other MSPs up and down California. So we just finished another transaction in Southern California. So we now have offices, we have a headquarters in Modesto, California. We have another office in central California and Fresno. And we also have most recently an office in orange County in Irvine, California. Now the last four years or so, we also transitioned to being an MSSP. So we’d developed an actual security practice. And so we’ve been layering on those security services when we purchase these other firms throughout the state.

Paul Green:
What are the things that you think have made the biggest difference to you over the last 15 years? Because you’ve achieved quite a lot. I mean, how many employees do you have at the moment?

David Darmstandler:
So we’re a team of just above 60.

Paul Green:
Okay. So I mean, that’s a fair leap in 15 years. And what would you say has been the most important things to you over the years in terms of achieving that growth?

David Darmstandler:
Our mission here, and it took some time to really figure out what that was, even though we were doing it already was, we really want to see people come up. We really want to improve the communities that we live in. And when we say see people come up, my partner and both came from nothing, right? So I grew up as a poor kid, kind of government housing almost. And he grew up pretty poor himself. So we love to be able to help people that work hard, that are smart, that really want to make something of themselves. We want to be part of their success. And so realising that and building great company cultures and finding great people that we want to work alongside and with both on the client side and as a team, I think has really made the biggest difference.

David Darmstandler:
I know that sounds kind of cheesy, but really it was. Bad clients and bad team members can suck a lot of your time, right? So the ability to work with great people on both ends, whether it be a customer or whether it be a team member and it really… And even firing bad customers has really allowed us to speed up our growth and focus on where we’re going as an organisation. So that’s definitely one part of it. And then obviously there’s a lot of other things that have happened over the years, but just developing that team and really narrowing down what we do. So I think a lot of MSPs struggle, at least the guys I know with doing everything under the sun and it builds builds even confidence in your customers when you say, “Hey, we don’t do that. But we know some firms that do and we can recommend them,” or we just stray away from those things that we’re not experts in, has allowed us to really accelerate growth.

Paul Green:
To sustain 60 employees. And presumably the hundreds and hundreds of clients that you must have and thousands of end users, there must’ve been a point where you got really serious about sales and marketing. Can you sort of pinpoint when that happened?

David Darmstandler:
Yeah, absolutely. I mean, really, I would say the first three years or so Was primarily, in fact, totally word of mouth. I would see following that, we started to realise we needed to do a little bit of outbound. And so we obviously had a website, some other things we started to kind of creep into some social because social was pretty new then. I would say probably about year five or so. We got a little bit more serious and by about year seven, we had hired a marketing staff and it’s a big part of what we do now. So we’re big on particularly digital marketing, but also just ensuring that from kind of beginning to end, the customer has a good experience with your marketing and your branding. And there’s a lot of different ways that you can lose a customer in the process, right?

David Darmstandler:
Whether they are just visiting your site for the first time or whether it’s in the sales process where you’re too slow to get back to them or what you’re trying to sell them isn’t clear to them or your stuff looks horrible, that you’re presenting, right? So there’s a lot of things in that circle of the sales process from beginning to end, as far as when it comes to marketing that we really tried to, and we continue to tweak all the time. That’s a very big part of our business. I think it really has set us apart when you and I’ve heard you say this on your podcast, but when you go to the sites and literally, I think I’ve seen the same stock image used on every single IT website, MSP website, it’s this one with zeros and ones in the background and a girl on a computer.

David Darmstandler:
And it’s like, “If I see one more, I’m just going to like…” Really trying to, I think what we’ve done well is humanising our brand and showing faces because that’s who we are. And so that’s been a huge part of I think our success as an organisation is just helping people. It’s one thing when they’re talking with the tech, but when they can actually see that tech space, especially now with the environments we’re working in, right? With COVID and that person’s more than likely not going to come onsite for simple things, just due to risk. I think that’s been a big part of our success is continuing to remain human. And when I say human, I mean showcasing those team members that have been with us this whole time and have really come up in their careers too. What we’re doing in the communities that we live and work in.

Paul Green:
Now looking at the management of the business, I am going to make the assumption that you’re well-managed, that you’re well organised. And I made that assumption because in the conversations we’ve had before this podcast, and today you seem quite relaxed. You’re not as time pressured as some people would be. And I’m guessing that there’s a good management structure in place. I think a business with 60 employees would fall over very quickly if it didn’t have that good management structure in place. When was the point at which you realised you had to get serious about not just managing your staff, but actually leading your staff and setting up an infrastructure and making sure that every single person was being developed and had the opportunity to grow?

David Darmstandler:
I guess maybe from the beginning, my partner and I really always had that mindset, right? We’re reading a lot of books. We have mentors and about five years in, we hired a business coach. So someone that had done some pretty amazing things and really helped us to think through our structure and help us get through the day in and day out. I mean, he even went to the point where he made us log every 15 minutes of our day. So if I was using the restroom, and I probably put too much information there for him because he would send back, he would be laughing when he would respond. He’s like, “I really don’t need to know what you did with your spouse.” But no, I mean, I think overall that really even myself looking at my day and going, “Gosh, what am I doing?”

David Darmstandler:
Right? I’m not even focusing on the things I’m best at, I’m not focusing on the things that are most important. I’m really just reacting all the time. So there’s no strategic proactive work. And so about five years in, we started to kind of really identify areas organisationally that were struggling or needed more direction or regular supervision. Looking at today, we have a management structure. We have organisational units. We have regular check ins one-on-ones with every employee, career paths, all these things that are impossible to do if, as the owner of the MSP, you’re doing all of it, working with customers, managing finance to… I’ve seen some of these threads on your Facebook group. I mean, it’s a lot, right? I mean I saw one, I think yesterday they were saying, “Who’s ready to throw in the towel?”

David Darmstandler:
I remember those days, right? Because I was managing finance, I was managing customer relationships. I was the voice engineer. I was the guy dealing with a server outage. I think what we did well was we continued to not pay ourselves what we should have. And we would make big investments into those leaders that we needed, whether that was people that we raised up internally. But oftentimes those that as we got to a certain size, we had to bring in from the outside.

David Darmstandler:
I think that was really what’s helped us to get to that next stage. And there was always these pain points, right? So you would get to five employees and there was a big leap you had to make. There was 10 employees there’s a big leap, you get to 20 or 30 and you get stuck there for a little while just due to cashflow or its risk, right? Every one of these big decisions or these managers you bring on, it’s expensive, right? And sometimes they don’t work out, which is even worse. It was really just about making those leaps and doing it with faith that it was going to pay off. And that we’d kind of framed out what the problem was and what we expected as a return when we made those decisions. I think that that made a big difference in kind of continuing to propel our growth each year.

Paul Green:
So you mentioned a couple of times that it was about five years in. So I guess around about 2010, when you started getting serious about your sales and marketing, you started getting serious about your management. Was this a formal decision? Did you guys decide, right, we want to be big, we want to grow, we want to be well organised, we don’t want to be the guys doing everything forever. Or was it just something that you fell into, as you say, it was just a case of, well, we needed to do this, we needed to do that, and then suddenly we had 20 employees so we needed to do that. I guess I’m asking, was there a driving factor or is it just being an organic thing?

David Darmstandler:
No, there was definitely a driving factor. I mean, I distinctly remember kind of around that time that we took our team that we had at the time and that was engineers and all kinds of, we were pretty small, right? And we went and we rented this room in this pre, we let the person that was kind of overseeing some of the finances make the decision where we were doing the meeting, which was a bad decision because she picked the cheapest place in town, right? It was like the water pitchers you would not want to drink out of. But we got this little room in a, I wouldn’t even call it a hotel, but a motel or whatever.

David Darmstandler:
And we spent two days as a team going, “What’s wrong? Where do we want to be? Where do we want to go?” And really what we ended up doing first was really defining our values as an organisation. In that process we always we also defined some really just where do we see our company in five years? What do we all want out of this? Right? I mean, the fact that it was not just the two owners in the room doing all this, there’s definitely aspects of business that should just be the ownership defining. But the fact that it was the whole company that had ownership in what was decided and where we’re going and how we’re going to do it really brought about just a cohesiveness. We used some tools to kind of do that. You know, I think we used the Rockefeller habits on that one. Obviously you got books like traction and stuff like that.

David Darmstandler:
But really around that time was when we kind of framed out, “Okay, this is what we want to be when we grow up.” Right? We’re this small MSP right now, but we have big ambitions. We want to be national at some point, we want to be international someday. I’ve heard you talk about, and you and I were even talking about it previously, it’s baby steps, right? You can’t just go by next week I want to have five more employees and $100,000 more in MRR. It doesn’t work that way. Right? You’ve got to start to put the stuff in place strategically, start to put the people in place strategically to really get where you want to go. You have to measure these things. You can’t just say, “I want to be bigger.”

David Darmstandler:
You have to say, “Hey, I want to be bigger, my MRR right now is $100,000 a month. I want it to be $125,000. And I want it to be $125,000 at the end of 90 days.” That gives you a measurable goal that you can find out how far off you are. There’s some great books we’ve used for that as well, some great tools, but I think that’s a really important part is just making sure that you’re honest with yourself and the process. What I love about listening to stories about Google is they don’t let you sandbag, right? I mean, if you set a goal, it can’t be just a standard goal. It has to be a stretch goal of some kind, has to be something that stretches you personally, stretches your team. I think that’s something we’ve lived by here. And I think it’s made a big difference as an organisation.

Paul Green:
This is great stuff. It really is. Now I want to talk about your transition or your addition of MSSP. So we do talk a lot about data security on this podcast. And I don’t think a day goes past in my life. And I suspect the same for most MSPs where data security isn’t the thing. We’ve talked before about how every MSP is eventually going to have to be an MSSP. It’s just going to be how things are, it will be the next big, let’s not call it a revolution. Let’s call it an evolution of tech support. Can you just start by explaining, just so we’re all sort of the same base level, what do you see as the difference between a managed service provider and a managed security service provider?

David Darmstandler:
Yeah, so I definitely see some grey area for some MSPs because I see them talking more about security and defining themselves as a security provider. They really need to be careful. I’m concerned about the wave of legal aspects that are coming for MSPs that aren’t prepared. You’ve heard in the news, but it is true. It’s not about if it’s about when an organisation is going to get hacked, unless they have the right things in place. I definitely would say what I see that’s concerning is that you have them saying that they do security, but really it can’t be the same team. Really, the true MSSP is managing detection and response to security incidents. And it can’t be your team that’s doing escalation. It can’t be your team that’s doing your server projects. You really have to have the right tools in place that are doing monitoring and are enterprise level tools.

David Darmstandler:
You can’t go cheap and you can’t let your customer go cheap because guess what? When stuff hits the fan, they’re going to be looking at you. If you were to define the differences, as an MSP, which is how we define it to customers is, as an MSP, we’re responsible for your infrastructure, your servers, and your network, end point users, help desk issues, things like that. On the MSSP side, we’re strictly monitoring and responding to incidents. And that team is separate. They’re not involved in any other MSP activities or business at all.

Paul Green:
You’ve got specialists, then. You’ve got people who just do what they do and they’re on it all day. And they’re not having to be distracted by setting up new users. And this ticket hasn’t been finished, all of that kind of stuff. So they’re just pure holy security.

David Darmstandler:
They’re not even in the MSP system anymore. I mean, they’re running in a completely different system. They’re a separate business unit. They have to be because we cannot have something go wrong there and it’s ethically, it’s the right way to do it. And that’s kind of goes back to our headquarters here. We’re building out like a 14,000 square foot space that has a network operations centre. And the security operation centre aspect has to be completely physically separated. It has to be darkened and you can’t see in there. And that’s just the technical side and the service delivery side, that’s not even getting into compliance, right? We are not compliance specialists. We are not going to be the ones doing the compliance aspect to you. We’re going to have some recommendations for you, but we’re going to suggest an auditing firm to you make sure customers are also in compliance with guidelines that are defendable, right?

David Darmstandler:
Like NIST and those kinds of things, that those are defendable because it’s the same framework that the government’s using. Right? And that’s one of the key reasons we made the acquisition down South was, they were a SOC 2 certified MSP, which is pretty rare. They focus strictly in finance and we were getting more and more increase from finance and banks and those kinds of things. So we wanted to have obviously that industry insight and experience, but also that SOC 2 compliance is extremely difficult. So it is not an easy certification to get. And even if you want to go even further you have this zero trust, which is also starting to come up. And I think these are all things that MSPs are going to have to take seriously. So even if you just want to be an MSP, you have to be secure yourself first.

David Darmstandler:
And if you’re not, because you guys everyone’s reading in the news, I mean, MSPs are getting hacked. And it’s just a matter of time. I don’t mean just technically, I mean, socially, right? So we’ve had social attempts where someone’s calling pretending to be a CFO or a senior person wanting their password reset on a weekend and it’s the on-call guy. It’s real, it’s happening. Your team has to be trained. You have to be doing internal training. That’s actually using tools and certifying that you’re actually training people. You have to have some security tools internally yourself. So you really have to protect kind of your homeland first when it comes to being an MSP. So even if you decide that an MSSP route is not for you, you probably should hire an MSSP to be monitoring your stuff because it’s probably a matter of time for you as well.

David Darmstandler:
No matter how technical you think you are, it’s happening and it’s happening to, we have firms in our kind of in this Northern Cal area that we know that buddies of ours that have been hacked and their client base got hacked. That’s to us, that’s a whole other part of the conversation, right, is regardless MSPs have to become more secure. And as they learn that they may see some ways that they can train, they can also open up an MSSP side of their business, but I would highly recommend not having people kind of filter between both sides. They really need to have a focus team, which is expensive.

Paul Green:
It is expensive, but I imagine it’s paying off for you both in terms of you’ve got proper services to sell to your existing clients and you absolutely know that you can deliver them. So I guess you’ve got a profit centre there, but as you say, you’ve also in a way future-proofed your business because you’ve got people who are completely focused on that. So what was the driving factor for you of starting up the MSSP side? Was it simply looking into the future and seeing this is the way we’re going, or again, was it just the next evolution for the business?

David Darmstandler:
It took us about a year and a half to get up and going. And so that process probably started five years ago plus, I would imagine somewhere in there. For me, it was a couple fold. It was really obviously seeing customers experiencing outages and being hacked, right? So that was one thing, it was just a level of empathy. The other side to it was as that started to see that, we struggled to find anybody that could actually help with these incidents. That was kind of light bulb number one. And then as I just started to do market research, I looked at the growth pattern of security and I went, “Man, I mean, MSP growth pattern’s great. Right? It’s also very healthy. There’s nothing wrong with that market’s, it’s going to continue to grow. It’s a big need.”

David Darmstandler:
But when you looked at security as a team, we went, “Man, that’s a rocket ship.” It’s another part of our business where we’re always strategically looking at where’s the biggest kind of pool to be in, right? I don’t want to be in a pond anymore. I want to be in a big ocean of market potential. And whether that’s your industry focus or whether it’s the services or solutions you’re providing, it makes a big difference when the market’s very large. And it has a high growth rate as opposed to being in something that first of all, there’s too many people in it and it’s really difficult to differentiate yourself. This has been a huge differentiator for us as we’re going in against traditional MSPs. We’re the only one often time that can offer both sides, right? So we can offer both the security aspect and the traditionally MSP products. That’s also big the big side of it, but I mean, really it was just the market potential was kind of what initially attracted us to getting into the space.

Paul Green:
Let’s talk about acquisitions now, David. So how many businesses have you acquired now?

David Darmstandler:
So two in the past two years.

Paul Green:
Okay. So we’ll come on to some of the factors of how you found them and the deals you did. And I’m not going to ask you to disclose anything confidential, of course, but what was it that drove you to do these acquisitions?

David Darmstandler:
The first one was really that we knew we wanted to grow and we wanted to grow into this particular region, which was the first one we did was Fresno, California, had very little competition, large market, it was roughly a million people in the greater Fresno area. And there was maybe two providers, three providers, right, that we consider competition. So we actually had in a smaller area where our headquarters is, we have more competitors and less people. We had tried things in the past two or three years in, we had actually had an office in Texas actually because we got a big contract down there with a big customer who was kind of a managed service contract. We decided to put an office there, a little satellite office. And we thought, “Oh man, we’ll get this one contract. We’ll hire a sales guy, have an engineer. We’re going to grow this Texas area.”

David Darmstandler:
Well, we learned a lot of lessons. Being able to drive to something is very different than getting on a plane and flying for four hours. Right? And having to get a hotel room and all the different things you have to do when you are flying somewhere. We had no core management from Data Path there, it was people we were hiring. So they didn’t know our culture. It wasn’t a disaster. It was a dog, right. It didn’t do anything. We didn’t get any new accounts. And so we realised this grassroots aspect was difficult to do, right. It was to set up an office you had expenses, you had those bodies and then you had essentially zero income.

David Darmstandler:
Where with an acquisition we have a lot more cost because we’re buying the organisation, but we immediately have some income and we have customers and we can grow that customer base. We can cross sell to those customers. The first one we were… It was all new. Right. We read whatever books we could. We talked to people that had done acquisitions. We tried to prepare ourselves as best we could, but we obviously we learned some things along the way. So great experience, super thankful for the team that we were able to acquire in Fresno, but it also helped us to know kind of what we were looking for. Right. So what kinds of things we would like to see in future acquisitions, whether it be revenue mix, types of customers, types of contracts, really team members, kind of the level of management and stuff that we would like in future ones. So anyways, that was the initial Genesis of where we started.

Paul Green:
And where did you find the acquisition targets?

David Darmstandler:
We’ve just really been using consultants. There’s a number of consultants out there on the sell side. You kind of just let them know that you’re looking, they will kind of be your go between, right? So the whole concept of reaching out yourself to someone, especially if they’re a competitor, trying to buy them, I have not found to be successful. Right. It’s almost, first of all, you don’t know what you’re doing and secondly, you need to really pay good professionals that do this all day long. Right? They do these acquisitions and mergers and so forth. So we depend heavily on those firms. So there’s quite a few now that seem to be just focused in the MSP space. Generally they’re pretty good to work with and you can give them some criteria of what you’re looking for and even geographically, and they’ll sometimes help you target some that’s definitely something that’s helped, but definitely on the other side we do have people reach out.

David Darmstandler:
So we have some that we either know that we’re close with, that they’re in different geographical regions. And so we’ve had a few that have reached out even recently that just would like us to look at maybe purchasing them for all kinds of reasons. Right? Sometimes it’s just personal, that they kind of want to go do something new or they’ve got some of other personal issue going on. There’s that kind of stuff we know what we’re looking for. We’re looking for some management on those teams and we’re looking for people that kind of want to come along with us. We don’t just want to buy and kind of shed bodies. We want to actually buy and grow those regions and grow together as a team. So it’s a very narrow type of target that we’re looking for. There’s not as many of those for sure. There’s a lot of guys they’re kind of coming of age that maybe want to get out, but we’re looking for some that have some management on them, for sure.

Paul Green:
And in terms of the deals that you struck, and I’m not going to ask you to reveal figures, David, but what kind of deals in terms of payment did you do? So was it all cash up front? Was it any kind of shares in your business? What percentage did you pay on day one versus deferred income, et cetera.

David Darmstandler:
Most of the deals I’ve seen in the MSP space, there are more cash ones happening. They seem to be happening at a discount by what I’ve seen. So they might give you multiple of your EBITDA, basically your profit. So it depends, on our side, ours is a combination of cash and earn out for the actual sellers. And again, it’s a case by case basis, right? So whatever you’ll see in articles and stuff, some company got bought for X amount, but the deal structure can be mixed up in a lot of different ways to where there may be a greater benefit to the seller to delay some of the income and stuff like that for tax reasons and those kinds of things. But generally at the sizes that we’re doing deals, which is kind of that $150,000 a month in MRR, or even $100,000 we would entertain, but up to $200,000 or $300,000 a month in MRR. Those are oftentimes just a combination of cash, some form of carry and some form of earn-out.

David Darmstandler:
And a lot of it has to do with more just for the fact that sometimes there’s question marks on the actual MRR or the contracts themselves with those customers, or you get data that the customers aren’t super happy. So there’s a risk that they may just go away or they make up a lot of their MRR, right? So you have a heavily weighted customer where they’re making up 20% of that company’s MRR. So if that customer has to go away it’s kind of scary for all the bodies you’re employing there in that office.

Paul Green:
We call those whales. I don’t know if you call them whales as well.

David Darmstandler:
I mean, they’re not… Again, I guess it. You’re not going to turn that business away, right? I mean, somebody comes to you and offers you a substantial contract compared to what maybe you have existing or maybe that you’ve had them for a long time.

David Darmstandler:
And definitely there’s some things I think can bring value for MSPs. I think it’s a good process just to maybe research due diligence and get an idea of what people are looking for or what buyers are looking for. Then also ask themselves whether they want to stick around. But I mean, there’s some basic things that we’re not seeing in some MSPs we’re not seeing C-SAT data. I mean, we’re not seeing the data from the customers as to whether they’re happy with the service. That affects how you look at the contracts, right? So for instance, if they’re on a month to month contract or an annual contract, we find it’s more difficult oftentimes to get people in these three year contracts, just because it’s hard to get a customer, right? Especially right now with COVID, right?

David Darmstandler:
Just signing three years of an agreement, but you’re telling the buyer, “Yeah. All my customers are happy,” but you have no data to support that. You have no idea whether…

David Darmstandler:
And you also just your response time to tickets, how long it takes you to resolve tickets. Do you have a bunch of stale tickets, all that tests is signs that your customers, you may think they’re happy, but they’re actually thinking about leaving. So there’s a lot of different stuff like that as you kind of go on, now that we’re two deals in, and this is our plan is to continue, right? So we want to continue to acquire MSPs and want to do that throughout kind of West coast here in United States. And we’re looking for good people to join us in that and managers and leaders. And what I love about it is, we always learn in these acquisitions too, right? It’s not one way where it’s the Data Path way and we know how to do everything. It’s so great to see smaller MSPs doing something way better than we do it and going, “Man, that’s a great idea. We should totally do that.” Right?

Paul Green:
That’s so cool. So what were some of the mistakes that you made in the first two acquisition which you learnt from, and you won’t repeat in the third, fourth, fifth acquisitions?

David Darmstandler:
Not valuing culture was a big one. Not having more time in that company we’re going to acquire, in their office, getting to know people, understanding more about them and how they operate and kind of the culture of the company, because that is way more difficult to change than changing products or services, or a contract or what tool you’re using or whatever. That was a painful one, because that ends up just eating a lot of your time. So making sure that the companies that we are looking at as targets have values whether they’re spoken or unspoken, but hopefully spoken and written down somewhere was it was a big part. I think some of the other things was just obviously looking closer at the accounts, the types of accounts they had, a lot of MSPs have a lot of these really tiny contracts and accounts that are really difficult to keep profitable.

David Darmstandler:
They kind of have these contracts where they’re just watching backups for people, or they’re just doing network monitoring, kind of stuff that was, I would say, it’s legacy stuff that hasn’t been switched over. They haven’t properly managed these accounts and gone out and said, “Hey, this legacy contract that you’ve had for a decade, we don’t make any money off it. And it’s not even the right thing for you, but here’s the right thing for you.”

David Darmstandler:
So you end up doing all the heavy lifting on that stuff after you buy it. And so just making sure that you’re focused on, I would say, what we’re looking at from learning from these lessons is just focusing on the MRR, the mix of the MRR, just making sure that it’s kind of a modern MSP design, not something that’s legacy or really more value added reseller, right? Or like break-fix, because we do zero break-fix. Even our systems, we’re not set up to manage break-fix any longer or if a customer calls and that’s what they want, we just refer them to somebody else because it’s just not our model.

Paul Green:
We don’t want it. Take it away.

David Darmstandler:
Yeah.

Paul Green:
Absolutely. So this is an interesting question I’ve wanted to ask acquiring acquisitive MSPs, what can someone who’s listening to this do to their business to make it more appealing to you as an acquirer?

David Darmstandler:
It’s a great question. First and foremost, I think it would be stop being a jerk. If you’re a jerk that would be stage one, we see a lot of that, right? We see a lot of, I hate to say that, but in MSPs we see a lot of ultra micro managers. They really need to start to offload all those things and start to trust people in their organisation to… It’s really difficult as an acquirer to come in and the owner’s doing everything right. So they’re doing the finance, they’re doing the account management they’re doing, especially if they want to go away, right? They want to sail off into the sunset. It’s really difficult to come over and operate that when everything is, think of it as it like a building built on a single pillar, right?

David Darmstandler:
Or pole, you have the sky scraper. And it’s just this individual pillar of the bottom. It’s like, I know that they, there may be reasons there. Maybe it’s a lack of trust for those that work for them. Maybe it’s they want to maybe in some ways, they want to feel the most important. Whatever it is, start to let some of those things go, focus on the things they do best, really start to build up a team that can manage the accounts, can do the finance, can make sure that organisation’s operating well. That makes it a lot easier to come in and go, “Yeah, this is a good target.” Right? So that’s kind of, I would say, step one, right. Start to mature. Or like we say here, Data Path like adulting, right? And then obviously there’s the basics of on the finance side, ensuring that you have contracts that your contracts are good, that your contracts, this is a big one, that your contracts are actually transferable.

David Darmstandler:
So most attorneys or most guys that went and grabbed some online and they don’t even look and see that actually the contract says they can’t even transfer this to an acquirer.

Paul Green:
Wow.

David Darmstandler:
So you want to make sure in there that you are able to transfer that agreement to a new MSP that’s buying you and yeah, making sure that your accounts are under contract, they’re profitable. You know that you’ve gauged how happy your accounts are. They’re going to stick around, that you’re supporting them properly, that you have the metrics to show that, you need to watch your utilisation levels. So you need to know how utilised is your team, right? So you’re paying all these team members, are they highly utilised? Are they running at 50%? That makes a big difference to your bottom line.

David Darmstandler:
The other side is as a team, we want to come in and acquire someone and not be an uphill battle, fighting customers day one. That’s just not where we want to be. We want to come in and have it be like a happy ending, a happy thing that we’re able to continue to take what the vision and what this owners build and extend it into the future and add the tools and resources behind it. Those are a few key things there, but again like we’ve talked about earlier, baby steps. It’s like, if you weren’t preparing to sell your business, you don’t just sell it tomorrow. It’s the wrong time to sell it. Start having those conversations early, find out what’s wrong with your business that maybe needs to be corrected, set some goals to fixing those things, realise financially kind of what you’re going to walk away with.

David Darmstandler:
Because I think sometimes there’s some unrealistic expectations. And if you were to turn the table, they would make sense to you. Like, “Oh yeah, I get it. If somebody buys my company, they have to get some kind of return in a reasonable timeline.” So I think those are a few aspects of it. Like I said before, I think it’s a level of maturity in the individual and oftentimes in the organisation that can make the MSP more attractive, even if they’re smaller. And the other side too I’d say is a lot of times we see really flat growth and that can be scary. Right? So that means that their churn is maybe large. So they’re losing accounts a lot, or it could also mean that they’re just not getting new accounts. So that could be a number of things.

David Darmstandler:
Sometimes that can be a signal that they have a bad name in the community, it could be that they don’t have a sales engine, they don’t have the marketing engine like you always talk about. Those can be some flags as well that can be worked on by the owners. But I mean, I would say a lot of times you ask an MSP, whether they know the answer to basics, can they tell you how much MRR they even have? Can they tell you how much of that is cloud? How much of that is security products? Did their customers’ backups run last night? What’s their churn percentage? There’s a lot of things that because they’re doing everything, they don’t have the time to step back and look at it holistically and really understand their business.

David Darmstandler:
They think they understand their business because they’re in the nuts and bolts of it. But in reality, they’re missing the big things.

Paul Green:
David, this has been just fascinating. I could actually talk to you for hours or so many more questions that I could ask you. What I’m going to do, I think is get you on the podcast again, perhaps next year, some time, it’d be great to have you on as a guest. In the meantime, how can people get in touch with you either perhaps just to connect with you or maybe because they run an MSP on the West coast and they want to offer you a great deal. What’s the best way to get in touch with you and perhaps learn more about your business?

David Darmstandler:
I love connecting MSPs in general. So it’s just great to connect and get to meet people from all across the world or in the same space, but they can reach me through my email, which is david@mydatapath.com

David Darmstandler:
You can also look me up. I have a very unique name, which is David Darmstandler. So you can find me on LinkedIn and message me there. And I can also for your site, Paul, maybe give you a couple other ways for people to kind of reach out to me directly. I’m more than happy just to even put my phone number out there if people want to give me a buzz, I’m a pretty open guy and responsive, as long as people aren’t trying to sell me something. But-

Paul Green:
Never put your phone number on a podcast, that never ever ends. Trust me on that one!

David Darmstandler:
Yeah, it’s 911.

Paul Green:
We’ll stick with the email address and the LinkedIn, David, thank you so much. I was going to wish you good luck with the business, you don’t need luck. You sound like you make your own luck in life, which the most successful people do. So thanks again for coming on the show.

David Darmstandler:
No, thank you, Paul. And I really appreciate what you’re doing. It’s a tremendous asset to our industry and I love listening to podcasts. So keep doing what you’re doing.

Voiceover:
Coming up next week.

Paul Green:
The podcast is back to its normal format next week, and we’re going to be looking at how to make sure your marketing is talking to the correct part of someone’s brain because yes, you can get it wrong and talk to the parts of their brain that doesn’t really make buying decisions. We’ve also got an interview with James Vickery from Benchmark 365, one of the companies that you can outsource your tech support to. And we’re starting a new series with a whole load of book recommendations from experts, both in our world and outside our world. That’s all happening next week. See you then.

Voiceover:
Made in the UK, for MSPs around the world, Paul Green’s MSP marketing podcast.

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